Federal Reserve member Beth M. Hammack said that monetary policy may already be below the neutral level, providing additional stimulus to the economy.
Hammack noted that the November inflation data may have underestimated reality due to data collection problems caused by the government shutdown in October and the first half of November.
The U.S. Bureau of Labor Statistics (BLS) announced that the consumer price index (CPI) rose 2.7% year-on-year in November. However, according to Hammack, given the measurement difficulties, the actual inflation increase may be closer to the 2.9%–3.0% range, where market expectations are concentrated. He argued that this indicates that the decline in inflation is more limited than anticipated.
One of the main reasons Hammack is cautious about interest rate cuts is his view that the “neutral interest rate” may be higher than the general consensus. Hammack notes that the neutral interest rate cannot be directly observed, but inferences can be made based on the current state of the economy and growth dynamics. He states that the US economy has the momentum to sustain strong growth next year as well.
On the other hand, Hammack, the president of the Federal Reserve Bank of New York, argued that after three consecutive interest rate cuts in recent meetings, there was no need for further action in the coming months. He stated that he was more concerned about persistently high inflation than a potential weakening of the labor market, and therefore opposed the recent rate cuts.
Hammack, who does not have a voting right on the committee that makes interest rate decisions this year, will gain voting rights next year. In an interview on the Wall Street Journal’s Take On the Week podcast, he stated, “My base scenario is that we can keep interest rates at current levels at least until spring. We need to see stronger evidence that inflation is clearly slowing toward the target or that there is more pronounced weakness in the labor market.”
*This is not investment advice.